Israel – The Promised Land of Crypto Regulation?

The meteoric rise in the popularity of cryptocurrencies and blockchain has not been without its fair share of controversy. Despite ongoing efforts by its most ardent believers to extoll the virtues of cryptocurrency, most governments and institutions remain wary of the burgeoning sector. The problem for many observers and would-be participants is the almost complete lack of regulations and standardization across the industry.

Some countries have started regulating various aspects of the crypto sector, but the rulings have been piecemeal in nature and focused on narrow topics. The SEC’s recent decision, for instance, clarified the nature of bitcoin and Ether, but made no mention of the other nearly 1,600 cryptocurrencies available or the ICO trend. South Korea has had its own regulatory maze to navigate, attempting to ban crypto trading before reversing course and patching together a more reasonable regulatory framework.

To date, few governments have attempted to create a comprehensive and technical view of cryptocurrencies from an institutional perspective. That changed this year when Israel announced that it was working on its own set of regulations that have been slowly revealed over the first half of 2018. With these new in-depth regulations and notes on the industry, Israel, which is already a major hub for blockchain, could be positioning itself to lead the way for the rest of the world in regulating the crypto market.

Working From a Position of Knowledge

One major critique emanating from the cryptocurrency sector in terms of regulations is the fact that most times governments are attempting to supervise an industry they know and have learned little about. This was evident in the swift reaction and backlash South Korea faced after its initial attempt to completely ban cryptocurrencies. Within hours of noting that it was a possibility, thousands of crypto investors were demanding a retraction.

South Korea’s case is far from unique and highlights the reactive measures most regulators have chosen to implement to deal with cryptocurrencies. Until they become a pressing issue, governments are more than happy to ignore the sector, a situation that usually means worse things for crypto. Even so, there is little doubt that well-conceived regulations are not just positive, but rather necessary for crypto to continue advancing.

The number of ICOs considered scams continues to climb, and there are legitimate concerns that cryptocurrencies can be utilized as vehicles for money laundering, trafficking, and other illegal transnational activities. Some have placed the number of ICO scams as high as 80% of all token offerings, but the actual number is hard to pin down. What remains true is that these issues largely stem from a lack of regulation and transparency requirements. On the other hand, the opportunities for blockchain should the market be properly regulated are significant and could open the floodgates for institutional money to pour into the industry.

With that in mind, Israel took a more measured approach than other governments. The country already stands out as a major hub for blockchain startups, with the number of companies in the sector nearly doubling between 2016 and 2017. Today, more than 60 companies operate in the market, and have been greatly encouraged by the government. Regulators’ explorations actually started in 2016 with the Supervision of Financial Services law, which appointed a regulator to study and lay down the foundations for regulating digital non-institutional currencies. As such, the new framework has been introduced in stages, with the law coming into full effect in October 2018.

Even aside from general regulatory actions, Israel has shown a clear desire to work with, and not against, the cryptocurrency sector. Israeli-based companies raised over $480 million through ICOs in 2017, and the government has already moved to provide some legitimacy to the ICO sector. Regulators have announced that ICOs will be taxed through VAT, and cryptocurrency businesses must produce standard accounting forms such as P&L statements. While these will not fix all the gray areas in the ICO ecosystem, the government hopes to build transparency in the sector to help it thrive and gain credibility. These changes are seen as slightly controversial, but broadly positive for the sector as a whole.

More than the long-term planning involved, however, is regulators’ detailed and comprehensive approach. A document published in May 2018 revealed the expansive set of rules and guidelines for identifying, reporting, and documenting of virtual currency holdings by financial services providers. These are some of the most thorough rules written yet and even include an in-depth and comprehensive approach to solving the problem of identifying anonymous coin holders.

They also follow the Israeli Supreme Court’s decision in favor of crypto exchanges, which ruled that banks and other financial institutions must not restrict crypto companies’ access to banking services based on speculative factors such as assumptions of risk. The new rules may be controversial in some cases, such as the reporting requirements for financial service providers. In addition to names, ID numbers, and other personal details, companies would also have to collect users’ public key numbers and even their IP addresses. Regardless, the move is seen as a major step forward for cryptocurrency regulations and could position Israel as a pioneering force embracing cryptos and aiding their adoption.

Most importantly, though, the new regulation will facilitate the interaction between the crypto sector and institutional investment and banking services. Most major investment firms and banks have been staunchly anti-crypto due to the industry’s perceived “Wild West” mentality and consequently its reputation. By creating a framework that lets cryptocurrencies and blockchain continue to thrive while reassuring institutional investors, regulators could open the market to a rapid surge of liquidity.

Leading the Way With Smart Regulation

Instead of a stifling reaction to cryptocurrencies, Israel has gone all in on identifying a comprehensive regulatory solution. The country’s positive direction could be a template for other countries looking to help the sector grow within their own borders. As more governments realize the value of blockchain and cryptocurrencies, the Israeli model may be an ideal tool to kick-start growth in their respective jurisdictions.